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In our March 5 post, we argued that the Obama administration linking Ukraine aid to IMF reform was disingenuous and counterproductive. We were right: the legislation failed, congressional Republicans were angered, foreign governments were annoyed, and aid was delayed. All for what? Without IMF reform, Ukraine will still get every penny it would have gotten with IMF reform. Today’s Geo-Graphic shows this. And more… Read more »

For Ukraine’s beleaguered bond market, the seminal event of 2013 was Ben Bernanke’s now-famous taper talk of May 22. As today’s Geo-Graphic shows, it sent yields soaring to levels they never came back from.

Ukraine was uniquely susceptible to taperitis, having been sporting a current account deficit of 8% of GDP—considerably worse than other big victims such as India, Brazil, Indonesia, Turkey, and South Africa. Its current political crisis clearly has deep roots, yet it is interesting to speculate as to whether Yanukovych could have held on had it not been for the country’s spiraling debt costs—sent spiraling by the Fed last May. Read more »

“In considering whether a recalibration of the pace of its asset purchases is warranted,” Fed Chairman Ben Bernanke offered back on May 22, the Fed “will continue to assess the degree of progress made toward its objectives in light of incoming information.” Read more »

The “law of one price” holds that identical goods should trade for the same price in an efficient market. To what extent does it hold internationally?

The Economist magazine’s famous Big Mac Index uses the price of McDonalds’ burgers around the world, expressed in a common currency (U.S. dollars), to estimate the extent to which various currencies are over- or under-valued. The Big Mac is a global product, identical across borders, which makes it an interesting one for this purpose. Yet it travels badly – cross-border flows of burgers won’t align their prices internationally. Read more »

Since its creation after the 1944 Bretton Woods conference, membership of the International Monetary Fund (IMF) has grown from 29 countries to 188. Representation, in terms of votes and quotas, has also become less connected with the relative weights of each country in the global economy. As today’s Geo-Graphic shows, China would be by far the biggest beneficiary of an IMF voting reallocation based purely on gross domestic product, gaining eight percentage points. What is much less well known, however, is that the United States would be the second biggest beneficiary, well above third-place Japan and fourth-place Brazil. As the United States already has enough votes to wield unique veto power, this would have little practical effect on its already enormous influence. But it does explain why the United States has been consistently more aligned with the so-called BRIC developing nations on IMF reform than with its fellow rich nations in Europe. Read more »

On September 21st the Fed announced that it would be selling $400 billion in short-term Treasurys and buying $400 billion in longer-term Treasurys to replace them – a maneuver titled “Operation Twist.” Atlanta Fed president Dennis Lockhart explained what it would mean for the economy: “It means lower interest rates – a lower cost of borrowing – across a whole spectrum of loan maturities.” Is he right? Well, China, Russia, and Brazil have conducted their own version of Operation Twist over the past several years, replacing roughly $330 billion in short-term Treasurys with long-term ones. The 10-year Treasury rate went sideways over that period, as shown in the figure above. Whereas the BRIC* Twist may have put some modest downward pressure on longer-term rates, other factors overwhelmed it. Don’t expect much from the Fed’s similar-sized version.

The U.S. is increasing its military and civilian presence in Afghanistan as part of the Obama administration’s efforts to bring stability to the region and reduce the threat of terrorism at home. Economic growth is critical for building a stable society in a war-torn country. Although Afghanistan’s economy has grown by 20 percent annually since 2002, this growth has largely been driven by foreign aid. Aid has risen by 25 percent annually since 2002, increasing from 32 percent of GDP in 2002 to 42 percent in 2008. These massive aid inflows have fueled corruption, and leave the economy exposed to destabilizing shocks once aid is withdrawn. Building a functional, self-sustaining Afghan economy is therefore vital to the success of the U.S. and coalition mission in the country. Read more »

The credit risk of oil exporting countries such as Venezuela and Russia tends to move with the price of oil. As a country’s oil export revenue improves, so does its ability to pay its debts. Recently, however, Venezuela’s CDS spreads have increased even while the price of oil has been stable. The market’s perception of an increased risk of default coincides with the Venezuelan government’s move to close banks representing 8% of the country’s deposits. On Tuesday December 15th the Venezuelan National Assembly passed a law increasing depositors’ insurance in an effort to prevent a run on the banks. Problems in the financial sector have become the primary driver of Venezuelan sovereign credit risk. Read more »

With the United States and other developed countries no longer serving as the engine of global demand growth, a new source of growth is needed. In the past few years, emerging markets have been an important source of global demand growth. The IMF expects this trend to continue, with demand in the emerging world recovering faster than demand in the advanced economies. Read more »